Interest rates and bond prices are inversely related. Suppose a person owns a bond of the value of Rs.1000 carrying 8% interest. His yearly income is Rs.80. Now further suppose that the rate of interest rises to 10%. The interest income of the bondholder will still be Rs.80, but the value of the bond will fall to Rs.800. It is because that Rs.800 will give an income of Rs.80 at the 10% rate of interest. Reverse will happen, if the rate of interest falls.
